Argentine peso breaks through trading band upper limit for the first time, but central bank denies it; Milei administration’s foreign exchange strategy faces a test

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On Wednesday the 17th local time, the Argentine peso exchange rate broke through the upper limit of the government-set trading band for the first time, forcing the central bank to intervene using foreign reserves. This marks a setback for Argentine President Milei’s policies to control inflation and stabilize the exchange rate.

On Wednesday, the Argentine peso fell nearly 0.4% against the dollar, with 1 USD worth 1,474.50 pesos, breaking through the upper limit of the trading band set under Argentina’s agreement with the International Monetary Fund (IMF) of 1,474.345 pesos for the first time. Afterward, a report disclosed by the Argentine central bank showed that $53 million in foreign reserves were sold that day to intervene, marking the first direct market operation by the central bank since the implementation of the new exchange rate framework.

Later on Wednesday, the Argentine central bank denied that the peso had breached the upper limit of its trading band, saying its own calculation differed slightly from the publicly disclosed formula, claiming its internal upper limit is 1,474.5 pesos. However, the market generally believes this event exposed the fragility of the government’s foreign exchange strategy. Investors are worried that with limited foreign exchange reserves, continued defense of the trading band could further undermine Argentina’s financial stability.

This breach of the upper limit by the peso occurred as the Milei government stepped up foreign exchange controls. Recently, the government has continuously tightened bank foreign exchange rules, restricting brokers from using peso financing to buy dollars, attempting via multiple measures to curb dollar demand and stabilize the peso’s exchange rate.

Trading Band Breach Triggers Policy Dilemma

According to the $20 billion agreement reached between Argentina and the IMF in April, the peso trading band expands gradually by 1% per month. Once the upper limit is breached, the central bank is permitted to directly intervene in the spot market, but this will consume precious foreign exchange reserves.

Thierry Larose, Portfolio Manager at Vontobel Asset Management, warns that defending the trading band could now come at a high cost. Larose said:

“They do not want to defend it to the end; it would be better to raise the band. They need to reduce local interest rates to avoid a recession and maintain fiscal sustainability. They should avoid depleting foreign reserves in a battle they are unlikely to win.”

The central bank confirmed in its operation report that $53 million in international reserves were sold on September 17. This marks the first market intervention by the monetary regulators since the new exchange rate framework was implemented.

Government Steps Up Foreign Exchange Controls

Facing pressure from peso depreciation, the Milei government has recently launched a series of new foreign exchange control measures. On August 29, the central bank imposed stricter foreign exchange limits on commercial banks, requiring banks not to increase their daily spot foreign exchange positions on the last trading day of each month, and, from December 1, to comply with the net global foreign exchange position limit on a daily average rather than monthly average basis.

On September 12, the Argentine National Securities Commission further tightened regulations, banning brokers holding peso-denominated repurchase agreements in the local market from selling dollar-denominated financial instruments. This measure effectively stops market participants from using short-term peso financing to buy dollars.

Juan Manuel Truffa, economist at Buenos Aires consulting firm Outlier, pointed out: “This is clearly a tightening of foreign exchange controls.”

Market Doubts Policy Sustainability

StoneX strategist Ramiro Blazquez believes that, considering the current “accumulation of electoral uncertainty,” these measures are unlikely to ease dollar demand. Milei’s Libertarian Party is seeking progress in the Buenos Aires provincial elections, a province that accounts for nearly 40% of Argentina’s population.

In the last week of August, the Argentine government extended the maturity of all notes in its bond auctions and increased the reserve requirement ratio for commercial banks at the central bank, effectively forcing banks to absorb more government debt. While these measures do withdraw liquidity and temporarily support the peso, they also bring additional pressure to the banking system and the domestic economy as a whole.

Investors will closely watch the results of Argentina’s provincial elections, seeing them as a barometer of public acceptance of Milei’s shock therapy policies, which will affect the outlook for the nationwide mid-term elections in October.

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